Educational Articles

Tesla's Road Ahead

Jeffrey R. Connolly
| July 21, 2011

Silicon Valley’s only automobile manufacturer, Tesla Motors (TSLA), strives to produce affordable electric cars with exceptional performance. The company has not yet earned a profit, and cash flow tends to be negative, reflecting considerable spending on capital equipment as well as research and development. The stock, which debuted in June 2010, has traded in a wide range over its brief history, with news and rumors fueling large swings in the share price. Although this stock is highly speculative, electric car manufacturer Tesla’s prospects over the 3- to 5-year horizon appear bright, as the forthcoming Model S may well generate sustainable profits.

With the release of the Roadster in 2008, the company affirmed that electric vehicles can compete with traditional gasoline powered autos. The Roadster’s aerodynamic body and low curb weight augment the 248 horsepower electric motor, which can power the car for approximately 250 miles on a single charge. In addition, the Roadster accelerates from zero to 60 mph in a respectable 3.7 seconds. Priced at $109,000, the Roadster compares to General Motors’ (GM) Chevrolet Corvette and Nissan Motors’ (NSANY) GT-R.

Thus far, Tesla has demonstrated that an electric car can contend with its gas-powered brethren, so now it is time to focus on affordability, well, slightly more affordability. Enter the Model S, a gorgeous sedan that will challenge luxury automobile lines, including Daimler AG’s (DDAIF) Mercedes Benz, Toyota Motors’ (TM) Lexus, and Tata Motors’ (TTM) Jaguar. Depending on the features, the sticker price ranges from $57,400 for the base model to $77,400 for the Signature series, which is in line with comparable luxury sedans. Moreover, a federal tax credit worth $7,500 and perhaps, additional state incentives will probably reduce the hefty price tag for most consumers.

When it comes to aesthetics, the Tesla Model S is stunning. An imposing grill and sleek body resemble Fiat’s (FIATY) Maserati Quattroporte. Moreover, a panoramic glass roof and premium interior styling, complete with leather and wood trim, ought to satisfy most luxury car buyers. In addition, technophiles will probably fall in love with the prominent 17-inch touch screen display, which controls the cabin temperature, radio, and GPS.

According to Tesla, the Model S accelerates from zero to 60 mph in 5.6 seconds and reaches a top speed of 120 mph. The long, flat battery pack, which is mounted underneath the car, lowers the center of gravity, increases torsional stiffness, and improves handling. Contingent on the battery unit, the car will have a range between 160 miles and 300 miles per charge, which can be recharged using any standard outlet. For longer road trips, a Quick Charge will return the battery life to 80% in 45 minutes. Also, a dead battery can be swapped for a fully charged pack in less than five minutes.

The Model S, which is scheduled for delivery in mid-2012, will probably be well received by the niche luxury automobile market. Indeed, reservations for the Model S have accelerated at a healthy clip over the past year. As of March 31, 2011, reservations total approximately 4,300, which is only slightly below the 5,000-7,000 units scheduled for production in 2012. Furthermore, Tesla is selectively expanding its distribution chain, building state-of-the-art showrooms in wealthy cities around the globe.

That said, the Model S faces a number of hurdles in gaining widespread acceptance. Charging stations are scarce, primarily concentrated in major cities along the East and West Coasts. Although a dead battery can be replaced with a fully charged unit, the infrastructure needed to support an on-the-go battery swap is almost nonexistent. Lastly, skepticism regarding the viability of electric vehicles will likely affect sales for some time.

Not only does the Model S look attractive, but it measures up quite well against similar luxury sedans on paper. Tesla seems to have a winning product in the pipeline and a solid distribution channel, which ought to support healthy top-line growth going forward. However, the crux appears to be controlling costs while expanding production. All told, the Model S may be the catalyst needed to boost TSLA shares to new highs.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.